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Nuclear energy setback and changes agreed to German low-carbon funding

China is investing in Europe, despite the United Kingdom’s delay to a new nuclear station, and German industrial CHP use will slow.

Market Overview

News that China might be thwarted in its plans to invest in the next generation of Britain’s nuclear reactors has been one of the talking points of the summer. EDF gave its long-awaited financial backing for the proposed Hinkley Point C station in July, although immediately the UK government said it would undertake a review, due in the autumn, of the contractual terms. But Chinese investment in the European energy sector is not just limited to the United Kingdom.

Regarded as another fundamental element of the energy mix is renewables, with Germany and the European Commission agreeing on the disputed exemptions to the renewable energy levy (EEG) for CHP generation by industrials for self-consumption.

Opportunity

Chinese firms are looking at buying assets and building infrastructure across central and eastern Europe with a particular focus on projects in EU-candidate countries in the western Balkans. UK Prime Minister Theresa May will discuss the Hinkley Point C deal at the G20 summit in September and has been urged to build on good relations with the Chinese, particularly in light of the United Kingdom’s decision to leave the European Union.

Recent changes to the EEG levy in Germany would mean that auctioning of capacity could be required. The current agreement is a compromise, where the impact on existing CHP units will be small. The exemption for existing CHPs will remain exempt as long as no major modernizations are made to these units. But for new installations of 1-50MW, capacity will be auctioned and is likely to see a slowdown in industrial CHP use.

Key Action

New nuclear generation in the United Kingdom is considered to be critical in reducing emissions while ensuring security of supply. This baseload form​ of generation already complements intermittent renewables with gas-fired output seen to provide the power when the wind does not blow. The UK government’s late intervention has not been welcomed although allows the opportunity for the new administration to ensure value for money for consumers.

While the EEG agreement—likely to be approved in September—provides certainty, it removes the advantage for industrial CHP use in Germany. Further court cases are likely and will provide some clarity on the modernization of existing CHPs.

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